9/14/2012
By Carlos Guillen, Research Analyst

More Articles by Carlos Guillen

Stock markets have continued to ramp higher as investors understood the positive effects of yesterday's announcement of a third round of quantitative easing (QE3). It is apparent that despite the high expectations that the Fed would pull the trigger on QE3, this action was not fully incorporated into equity markets. Moreover, a surprising rise in consumer sentiment and stronger than expected retail sales came together to lift stocks higher.

Quite surprisingly today, data showed that consumer sentiment accelerated in spite of a still depressing jobs backdrop. The University of Michigan Consumer Sentiment September preliminary result landed at 79.2, which was higher than the Street's expectation of 73.5 and represented the highest reading since May of this year. It is apparent that consumers' sentiment improved as it is likely that they may be feeling at bit wealthier given that stocks have continued to climb and that housing prices have improved. Perhaps, to a lesser extent, the fact that the jobs backdrop has not deteriorated may also be giving a momentary sigh of relief to consumers. Also surprising was that consumer's outlook suddenly reversed its negative trend. After three consecutive monthly declines, the expectations index increased to 73.4 from 65.1. This is rather tough to justify given that the cost of food and gasoline are continuing to climb. However, given that consumers have been reducing their debt burden, they may be feeling less constrained and more able to spend, improving their shorter view of the future. While it is certainly encouraging to see consumers more confident, it is difficult to see this feeling continuing much longer as consumers will soon be reminded of the uncertainty in fiscal policies; the uncertainty of changes in taxes and government spending is still a reality that consumer will soon be facing, and this will likely change consumers' perception.

Also encouraging on the surface was that retail sales in the U.S. increased in August by the most in six months. According to the Commerce Department, total retail sales increased 0.9 percent this past month, above the Street's consensus estimate of a 0.7 percent increase. However, this increase in sales was boosted by demand for automobiles, along with higher gasoline prices that left consumers with less to spend on other goods. We should also note that retail sales were negatively revised for July, declining to 0.6 percent from 0.8 percent. So while retail sales did go up higher than expected, the drivers were not encouraging as we expect auto sales to be temporary and rising fuel costs to take away from discretionary spending.

In all, we can't complain about today's positive move in equities, which had equity markets at their highest level in over five years, or at levels reached before the recession hit. The main concern is that the economic fundamentals are not supporting this rise, and more and more it is looking as if equity markets may be entering a mini bubble.

Carlos Guillen
Wall Street Strategies